Oil price decline could mean you'll be $90 better off
| Cambridge, Mass.
Economists have been cranking up their computers and calculating the positive effect of the oil price decline this year on the US economy.
Christopher Caton, an economist with Data Resources Inc. (DRI), figures it might add about 0.2 percent, or say $8 billion or $9 billion, this year to the gross national product (GNP) -- the output of goods and services. Inflation might be 0.5 percent less this year.
A young economist at the University of Virginia, James D. Hamilton, guesses it might have boosted output ''above trend'' by as much as 0.5 percent, or more than $20 billion.
If you take the larger figure, that's about $90 per head -- nothing to sneeze at.
Of course, such calculations are rough. But at least they give some indication of the importance to Americans and to the rest of the world of the price of oil on the world market and the decisions of OPEC.
Right now there is some speculation that the oil glut is ending and that prices could turn around and start rising again, though in a more moderate fashion than in 1973-74 or 1979-80. One reason is that Saudi Arabia, according to Japan's trade minister, Shintaro Abe, has apparently trimmed its daily output of crude to 6.5 million barrels, less than the official ceiling this month of 7 million barrels. Mr. Abe was just back in Tokyo from a visit to Saudi Arabia.
At DRI, the basic assumption is that imported oil prices will fall 7 percent in 1982, then rise again. The Lexington, Mass., economic consulting firm projects average annual increases, in real, after-inflation prices, of 3.7 percent between 1983 and 2000.
Mr. Caton and a colleague, Christopher Probyn, however, have looked at a more optimistic scenario, by which the nominal price (current dollars) of oil will increase marginally through 1985, and thereafter rise at the same rate as overall inflation. In that case, they calculate, the growth of GNP would be improved by 0.1 percent per year; inflation would be 0.3 percent less per year; and the oil import bill would be reduced to an average of 2.1 percent of GNP, compared with 2.6 percent in the more likely scenario in which auto prices rise modestly.
Some of these may seem like small changes until added up over the long haul. The price of crude, for instance, would be $118.32 a barrel in the year 2007 instead of $309.55. Real wages would rise 1.4 percent a year instead of 1.28 percent. The stock of automobiles in the nation would be 156.1 million in the year 2007, rather than 149.5 million.
Mr. Hamilton maintains that oil price changes are ''a bigger factor (in the US economy) than other people give them credit for.'' A year or so ago, he completed his doctoral thesis on this topic, concluding that oil price increases worsened most of the nation's recessions before the 1973-75 recession. That was a surprising idea for a group of economists who heard him talk last week at a conference here sponsored by the National Bureau of Economic Research.
Some economists have reckoned that the huge jumps in oil prices in 1973-74 and 1979-80 were a factor in the recessions that followed. Mr. Hamilton notes that US oil prices rose before every other postwar recession except 1960 by about 10 percent on average, although by as much as 40 percent in 1947-48.
Of course, that could be a coincidence. But he made a number of complex mathematical tests of the statistics to prove otherwise, and apparently was not shot down in flames by the skeptical economists at the conference.
Mr. Caton's reaction, without having seen the paper, was: ''That's one of the silliest arguments I have heard this week.'' He pointed to the relatively small size of the earlier postwar oil price increases.
But Mr. Hamilton countered that those earlier increases, which followed the Suez crisis and other events, were accompanied by some modest and brief fuel shortages in the United States. The Texas Railroad Commission, which was then crucial to the domestic supply of crude, did not usually accommodate interruptions in imports of oil by increasing its production ''allowables.''
Moreover, the great uncertainty as to the future of oil prices prompted some businessmen to hold up plant and equipment expenditures and some consumers to dampen their spending on durable goods.
Other factors hitting energy prices in the pre-1973 years were strikes by oil , coal, or steel workers (the steel strike held up supplies of pipe to oil fields).
His conclusion is that a 10 percent boost in oil prices means a 1 or 2 percent decline from trend in GNP. That, he reckons, could be as much as one-quarter to one-half of the total decline in the recession.
But Mr. Hamilton does admit that changes in the money supply, a collapse in exports, a banking crisis, and other factors are important to the business cycle.
Anthony M. Solomon, president of the Federal Reserve Bank of New York, told an audience in Bonn last month that ''for most of the past eight years the course of the world economy -- and indeed of world politics -- has been dominated by oil.'' If Mr. Hamilton is right, oil has been important for longer than that.